Moderating Effect of Firm Size on the Relationship Between Enterprise Risk Management and Quality of Financial Reporting among Commercial State-Owned Entities in Kenya

Abstract

Enterprise Risk Management (ERM) is widely promoted as a mechanism for improving the quality of financial reporting, yet its effectiveness may depend on organisational characteristics such as firm size, an area that has received limited attention among Kenya's State-Owned Commercial Entities (SOCEs). This study established the moderating effect of firm size on the relationship between Enterprise Risk Management and the quality of financial reporting among commercial SOCEs in Kenya. The study was anchored on Contingency Theory and adopted an explanatory research design. The target population comprised 420 management and finance staff drawn from commercial SOCEs in Kenya, from which a sample of 205 respondents was drawn using the Yamane (1967) formula and selected through stratified and cluster random sampling. Primary data were collected using a structured questionnaire, and 160 questionnaires were returned complete and usable, a response rate of 78.0%. The firm size construct, which captured respondents' perceptions of the scale of an entity's asset base and its influence on risk management and reporting, achieved a Cronbach's Alpha of 0.793, confirming its reliability, while a Kaiser-Meyer-Olkin value of 0.765 and a statistically significant Bartlett's test (p < .001) confirmed that the item set was factorable and suitable for data reduction. A three-step hierarchical moderated regression was conducted using mean-centred variables, with the composite Enterprise Risk Management score entered in Step 1, firm size added in Step 2, and the Enterprise Risk Management by firm size interaction term added in Step 3, computed using SPSS Version 27. Firm size significantly moderated the relationship between Enterprise Risk Management and financial reporting quality (interaction B = -0.152, p = .036), with the addition of the interaction term producing a statistically significant, though practically modest, increase in explained variance (ΔR Square = 0.011, F-change = 4.465, p = .036), leading to rejection of the null hypothesis. The negative interaction coefficient indicated that the positive effect of Enterprise Risk Management on financial reporting quality was stronger among smaller commercial SOCEs than among larger ones. The study concludes that firm size is not a neutral background characteristic but an active moderator of how Enterprise Risk Management practice translates into reporting quality, with larger entities' closer external oversight from bodies such as the Office of the Auditor-General plausibly reducing their dependence on internal ERM practice relative to smaller entities. The study recommends that the National Treasury prioritise Enterprise Risk Management capacity-building support disproportionately toward smaller and medium-sized commercial SOCEs, which appear to have the most to gain, in reporting-quality terms, from strengthened risk management practice.